Through one important piece of corporate computing jargon--"integration"--Oracle has found a justification for its $7.4 billion acquisition of Sun Microsystems. Now it will have to convince historically skeptical customers, too, that the idea makes sense.
The all-cash acquisition agreement--announced Monday, costing Oracle $5.6 billion with Sun's cash factored in, and expected to close this summer--puts the innovative but financially bumbling Sun out of its misery after IBM's move to buy it fell apart earlier in April. The way to fit Sun's technology into Oracle's business model goes back to a project called Raw Iron that's more than a decade old.
Raw Iron ideas placed application software front and center while demoting the server hardware itself and the operating system to a subordinate role. The customer who needs some database software need hardly know what's going on under the covers.
What's smart about the approach is that it lets Oracle profit from Sun's diverse technology--which includes not just servers but also open-source software including Java and the MySQL database that Oracle already tried to buy years ago--without disrupting its own business too much.
Oracle signed a Raw Iron partnership with Dell and worked on it with Sun, IBM, and then-independent Compaq. With Sun's technology in house, one major challenge of those deals--who's in the driver's seat--evaporates with Sun a part of Oracle. There's no longer any question about which partner owns the customer relationship, which services the technical support contracts, and how the sales revenue is divvied up.
Will server appliances work this time?
Here's the rub, though. Raw Iron, along with the related concept of server appliances that arrived a few years later, was a marketplace dud.
Customers appreciate integrated technology to an extent, but Raw Iron and server appliances quietly submerged beneath the waves. Also worrisome for Oracle is the failure of one of its integration ideas, Unbreakable Linux. Customers by and large ignored this Oracle attempt to offer its own version of Linux, a clone of market-leading Red Hat's product.
Oracle Chief Executive Larry Ellison is a true believer, though, making the sales pitch in the company's official statement:
"Oracle will be the only company that can engineer an integrated system--applications to disk--where all the pieces fit and work together so customers do not have to do it themselves," Ellison said. "Our customers benefit as their systems integration costs go down while system performance, reliability, and security go up."
He does have a point. Sun has always focused centrally on the database market, and it has compelling technology assets for it that it hasn't been able to sell effectively: its current Niagara and the delayed higher-end Rock multicore processors, its Solaris operating system, and its Thumper storage servers with tremendous built-in data capacity.
And selling products at this high level of integration gives Oracle a way to ingest Sun's considerable open-source assets--among them Java, MySQL, Solaris, GlassFish, NetBeans--without too much indigestion. It might even give Oracle some incentive to be more active with the open-source community it's mostly kept at arms' length.
The once and future server market
Another issue, though, is that server appliances are to an extent an artifact from an earlier era, when companies bought and managed discrete systems. That remains a big business, but it's at odds with two important trends gaining steam in the industry.
First is virtualization, chiefly through EMC's VMware software. This lets a single server run multiple operating systems, with the software collection moving flexibly from one physical machine to another as work load demands shifted. By breaking the hard link between hardware and software, virtualization undermines the integration sales pitch and inserts a third party's technology between the server and its higher-level software.
Second is cloud computing, where applications run on central servers on the Internet rather than in a company's own confines. Cloud computing takes many forms, but from Oracle's perspective, an excellent example is Salesforce.com, whose sizable cloud-computing service competes directly with Oracle's Siebel business for customer relationship management chores such as tracking who bought what and when their warranty is up for renewal.
But having Sun's hardware assets in-house gives Oracle more flexibility to adapt to cloud computing on its own, in particular through Sun's recently relaunched Network.com cloud computing infrastructure.
Financial complications
Sun Chairman and co-founder Scott McNealy and even more so CEO Jonathan Schwartz likely are breathing a sigh of relief. Sun's stock plunged after IBM's attempted acquisition of Sun fell apart, but with an Oracle acquisition offer also on the table, it's now clear why Sun could play chicken with IBM then issue a statement about the board's faith in Schwartz after IBM walked. On Monday, Sun's stock surged 36 percent to $9.07 in mid-morning trading.
Oracle seemed eager to justify the price, arguing it will improve Oracle's earnings per share significantly and that it will help the company more than earlier massive acquisitions.
"We expect this acquisition to be accretive to Oracle's earnings by at least 15 cents on a non-GAAP basis in the first full year after closing," Oracle President Safra Catz said in a statement. "We estimate that the acquired business will contribute over $1.5 billion to Oracle's non-GAAP (generally accepted accounting principles) operating profit in the first year, increasing to over $2 billion in the second year. This would make the Sun acquisition more profitable in per-share contribution in the first year than we had planned for the acquisitions of BEA, PeopleSoft, and Siebel combined."
It should be noted that although Oracle did surprisingly well integrating BEA Systems, PeopleSoft, and Siebel--despite having its own directly competing products in each case--but also that those were software companies. Sun is much more, and the future of its hardware business is cloudy.
Standalone server sales? At Oracle?
Oracle can sell software-hardware package deals and build a Sun-based cloud service, but how well will it serve customers who want to run their own machines with their own software? It's likely those companies will look elsewhere unless Oracle can show it truly wants to be a full-fledged hardware company.
It's not clear how much Oracle's financial projections rely on the strength of that standalone server business. Historically, selling software has much nicer profit margins. It's also not clear how much of a hit Oracle is expecting to its current software business after a Sun acquisition turns present allies into rivals.
Oracle also must deal with the fact that server makers Hewlett-Packard, Dell, and IBM could become less eager to promote Oracle's software. Because massive database servers are so complicated, Oracle has relied on tight sales, support, and marketing partnerships, and those companies could lose enthusiasm if their server sales force starts seeing Oracle's offering competitive bids.
At least Oracle's acquisition faces less of an antitrust hurdle than IBM's. Big Blue and Microsoft offer viable database competitors to Oracle's and Sun's, and Oracle buying Sun mean there would still be major server makers rather than the three left standing had an IBM acquisition gone ahead.
So Sun shareholders and government officials likely will be convinced of the merits of the deal. The ultimate success, however, will depend on how Sun and Oracle's customers see it.
This was originally posted at ZDNet's Between the Lines.
Sun Microsystems will reportedly be willing to resume takeover talks with IBM if Big Blue says it will commit to closing the deal.
Bloomberg reports the news based on two people familiar with the matter. The two companies currently aren't talking and each one is waiting for the other to make a move.
Gee, I wonder why Sun would be so willing to talk to IBM again...
(Credit:
Yahoo Finance)
Fairly obvious, eh? But it's not all about the stock chart. There's another little problem: Sun doesn't have any other interested parties. Meanwhile, rivals are preparing campaigns to poach customers. See Dell's latest move--perfectly timed at the exact moment Sun announced its server refresh.
Update at 6:45 a.m. PDT: Wall Street doesn't appear to be buying into Sun's prospects. In early trading, Sun spiked, but then quickly retreated. It's one thing if Sun wants to talk. It's quite another if IBM wants to do so.
Sun CEO Jonathan Schwartz's job appears safe for now following the collapse of negotiations with IBM.
(Credit: Stephen Shankland/CNET)After taking a beating in the stock market Monday following the reported collapse of a merger deal with IBM, Sun Microsystems stood by its leadership team.
Reuters reported that Sun declined to confirm the breakdown in negotiations, but did say "Sun is committed to its leadership team, growth strategy and building value for its shareholders." Speculation had been building that CEO Jonathan Schwartz was in trouble after The Wall Street Journal reported that Chairman Scott McNealy had quashed a possible deal with IBM over Schwartz's objections.
IBM and Sun had been talking for several weeks about a merger, according to reports, but talks broke down Sunday over the price to be paid for one of Silicon Valley's most iconic companies. Sun has struggled in recent years to translate its success during the last decade to the current period.
Sun's stock finished down more than 22 percent to close at $6.56 Monday, after rejecting IBM's last reported offer of $9.40 for the company's shares.
An IBM acquisition of Sun Microsystems would mean big change for the companies, cloud computing, and the technology landscape. We've rounded up our breaking stories, analysis, and interviews from the past few weeks as the story has unfolded.
Featured stories
Sun shares plummet on reports of failed talks
Company's shares fall nearly 23 percent in premarket trading, following reports that IBM has withdrawn its buyout bid for the struggling hardware maker.• Sun's board may have 'a lot of explaining to do'
• Sun stands by its man
(Posted in Business Tech by Dawn Kawamoto)
April 6, 2009 6:21 AM PDT
No IBM deal? Confusion en route for Sun customers
In the grand scheme of things, Sun was small potatoes for Big Blue. For Sun, the failure of the IBM-Sun talks was huge.(Posted in Business Tech by Larry Dignan)
April 6, 2009 5:06 AM PDT
Report: Sun rejects IBM offer, IBM withdraws bid
Sun spurns a formal buyout bid and terminates Big Blue's right to exclusive negotiations, prompting IBM to withdraw its offer, according to The Wall Street Journal.(Posted in Business Tech by Dawn Kawamoto)
April 5, 2009 4:07 PM PDT
CNET News Poll
Report: IBM eyeing Sun buyout at $9.55 a share
Big Blue is reportedly homing in on an acquisition price of $9.55 per share, as negotiations head into the final stretch, according to The Wall Street Journal.(Posted in Business Tech by Dawn Kawamoto)
April 3, 2009 7:57 AM PDT
Microsoft server boss on Sun-IBM, economy, more
In an interview, Bill Laing says the sluggish economy probably accelerated merger discussions. As for Microsoft, a deal would mean both one fewer partner and one fewer rival.(Posted in Beyond Binary by Ina Fried)
April 3, 2009 11:37 AM PDT
Report: IBM cuts price on Sun deal
IBM has reportedly lowered its buyout price for Sun Microsystems to a range of $9 to $10 per share, shaving a dollar off its previously discussed range, according to the Journal.(Posted in Business Tech by Dawn Kawamoto)
April 2, 2009 11:05 AM PDT
Previous stories
Will Sun/IBM deliver on open cloud computing?
Sun Microsystem's Sun Cloud Compute Service may be a very well-conceived open cloud service, but would an IBM acquisition let it execute?(Posted in Wisdom of the Clouds by James Urquhart)
March 18, 2009 3:16 PM PDT
Sun Microsystems shares fall in afternoon trading
Stock falls as low as 13 percent in afternoon trading, as investors await word of whether an IBM merger is a go, or no go.(Posted in Business Tech by Dawn Kawamoto)
March 30, 2009 1:16 PM PDT
IBM server VP talks about Sun strategy
An IBM server vice president discusses IBM's strategy to tap into Sun Microsystems' customer base.(Posted in Nanotech: The Circuits Blog by Brooke Crothers)
March 29, 2009 6:15 PM PDT
Intel CEO says Sun was shopped around
In the past few months, Sun was beating the bushes looking for a buyer to acquire the entire company, or its pieces, says Intel CEO Paul Otellini during an employee Webcast.(Posted in Business Tech by Dawn Kawamoto)
March 25, 2009 3:22 PM PDT
Sun CEO sees future of open source in the cloud
How do you make money with open source? You don't, argues Sun CEO Jonathan Schwartz. You monetize the cloud, instead.• IBM + Sun = Perfect for open-source monetization
(Posted in The Open Road by Matt Asay)
March 25, 2009 9:24 AM PDT
IBM wouldn't benefit from Sun's open-source plan
It's unlikely that Sun would have much to teach Big Blue. CEO Schwartz reveals the company's open-source playbook--one that IBM already knows by heart.(Posted in The Open Road by Matt Asay)
March 23, 2009 9:07 AM PDT
Report: IBM combs through Sun contracts
Big Blue, as it weighs a potential merger, is seeking to understand where Sun stands with its complex cross-licensing agreements and other contracts, according to The Wall Street Journal.(Posted in Business Tech by Dawn Kawamoto)
March 20, 2009 3:29 PM PDT
Will Sun/IBM deliver on open cloud computing?
Sun Microsystem's Sun Cloud Compute Service may be a very well-conceived open cloud service, but would an IBM acquisition let it execute?(Posted in Wisdom of the Clouds by James Urquhart)
March 18, 2009 3:16 PM PDT
Is it a bad idea for IBM to buy Sun?
Sun has some nice assets, but IBM already has many of them under its own roof. Here's a look at some of the difficulties IBM could face digesting its rival.(Posted in Business Tech by Stephen Shankland)
March 18, 2009 10:59 AM PDT
Sun activist shareholder to get payday?
Southeastern Asset Management, which holds a 22 percent stake, said last fall that it would engage in talks with not only Sun's management but also third parties.(Posted in Business Tech by Dawn Kawamoto)
March 18, 2009 6:13 AM PDT
Why an IBM purchase of Sun would make sense
Server market positioning and open-source resources, says ZDNet's Larry Dignan, are just a couple of the reasons to like a $6.5 billion takeover reportedly in the works.(Posted in Business Tech by Larry Dignan)
March 18, 2009 4:45 AM PDT
This was originally posted at ZDNet's Between the Lines.
It appears that Sun Microsystems won't be acquired by IBM, after all. Now the explaining--mostly to customers and shareholders--really begins.
Sun will tell its customers that the IBM deal was just a slight detour and that the company's plan to be a pivotal hardware, cloud-computing, and software provider remains intact. The big question is whether customers will buy Sun's talk--not to mention Sun's gear. For shareholders, Sun has to explain why it split over the IBM offer.
Meanwhile, The Wall Street Journal is reporting that Sun's board is split (Techmeme). CEO Jonathan Schwartz wants the IBM deal. Chairman Scott McNealy doesn't. Guess who wins that one? McNealy, who is dead wrong by the way, will return quips and all and probably bring the company back to its hardware roots. It won't matter. Sun's customers need to know only one thing: Schwartz's strategy (see the stack in the image below)--focusing the company on software--is in flux.
(Credit:
Larry Dignan/ZDNet)
Given reports that Sun had been shopping itself around and could find only IBM as a suitor, there's a decent chance that the company will remain independent for a bit. However, any customer buying from Sun will have to consider the ramifications of a purchase. For instance, if you're about to buy Sun hardware and Hewlett-Packard is in the running, why wouldn't you opt for the latter just to eliminate some uncertainty? After all, HP could buy Sun. What about cloud services? Will you trust your cloud to a company that has a tug-of-war under way over a buyout?
Look for Dell, IBM, and any other Sun rival to pounce into the fear, uncertainty, and doubt game. In the grand scheme of things, Sun was small potatoes for IBM. For Sun, the failure of the IBM-Sun talks was huge.
Every question about Sun will come back to the company's future plans. Do you buy Sun's road map five years out? Do you assume that Sun's cloud services will ultimately be absorbed elsewhere?
Given recent events, a tech buyer would be foolish not to incorporate Sun's future owner--and management--into any buying plans and use the IBM flap as leverage.
Shares of Sun Microsystems took a hit in Monday morning trading, falling at least 7 percent while the broader markets advance.
Sun fell as low as $7.53 a share, following reports Friday in The Wall Street Journal that IBM is currently engaged in combing through Sun's contracts, as part of the evaluation process on whether to move forward with an acquisition.
Sun's shares started sinking shortly after a big jump on word of a possible acquisition by IBM.
(Credit: Yahoo Finance)Sun's shares had been on a rocket ride, after reports surfaced last week in the Journal that IBM was in negotiations to acquire the company for roughly $6.5 billion.
After the reports surfaced, Sun's shares shot up 79 percent to $8.89 a share. The struggling hardware maker's shares had largely languished below $5 a share for the past five months.
As it reportedly shows IBM its contracts, Sun is approaching the end of its fiscal third quarter, which could provide Big Blue with additional data for its decision making.
Mark Hurd in 2006
(Credit: Declan McCullagh/CNET)SANTA CLARA, Calif.--At its annual meeting of shareholders, Hewlett-Packard Chief Executive Mark Hurd assured attendees that despite the economy, the company would be well-positioned against the competition.
"The market is getting tougher; all the hard work we've done up to this point has put us in a favorable position," he told the roughly 90 people in attendance.
There were just two items of business on this year's agenda--10 nominees to the board, all of whom were elected or re-elected, and selection of a new accounting firm--but neither were as contentious as the pointed question-and-answer period during which Hurd fielded questions about HP's competition, as well as his own compensation.
When asked about the potential of rival IBM snatching up Sun, Hurd gave an emphatic "no comment," but on the subject of Cisco--of whom HP is a customer--getting into the server business, he said he remained confident in HP's overall scale, and cited its cost-effective use of the same essential platform on which it builds its servers, blades, and PCs. HP will not be pulling out of all of its partnerships with Cisco, however, despite the new competition.
"I would expect where it makes sense in the market, we'll continue to be a partner of Cisco's," he said.
As technology spending has contracted over the past several months, competition has stiffened. HP's first quarter earnings were down 10 percent from a year ago, its first sign of weakness in an economy that has not been kind to technology hardware makers. The company responded by cutting employee salaries and canceling executive travel perks.
He was also questioned over HP's spending on research. The investor posing the question asked why Apple, a much smaller company with an R&D budget one-third the size of HP's, was able to achieve a market cap larger than HP's.
Hurd called Apple "a competitive company," and admitted that HP could do more to leverage the research going on at HP Labs. He didn't give any indication of what that would be.
At one point though, the questions became personal.
A woman from Marin, Calif., wife of an employee of HP for 37 years, politely asked Hurd how he could justify $42 million in bonuses when many employees were losing their jobs.
Hurd defended the pay package saying it was spread over three years between 2006 and 2008, but that he didn't choose it, the board of directors did, and that those were different times.
"The actions we're taking now are different than we took in 2008. We're being more aggressive." This year, he said, "I would think I would not get that same type of compensation."
Despite their tough questions, many of the shareholders who spoke were former employees and thanked Hurd for his service to HP.
Stranger things have happened, but there are several reasons why IBM buying Sun Microsystems could, to borrow a phrase from former Sun Chief Executive Scott McNealy, be like two garbage trucks colliding in slow motion.
The Wall Street Journal reported that IBM is in talks to buy Sun for at least $6.5 billion in cash, which would amount to about $4 billion once Sun's cash and marketable securities are taken into account. On paper, the deal could make some sense: adding Sun's server market share would give IBM more clout in its competition with Hewlett-Packard, IBM would get some software and intellectual property assets, and that price would be a nice premium for Sun shareholders disappointed with the company's sliding stock price.
But given how directly Sun and IBM product lines overlap, there are no shortage of serious difficulties, too.
Hardware
Let's start with hardware. IBM already has four major server lines running a variety of operating systems--AIX, zOS, IBM i, Linux, and Windows--on three major processor families. IBM needs Sun's Sparc processor and Solaris operating systems like it needs a hole in its head. It took years for IBM to break down some walls among its various server fiefdoms, but even now it has to reckon with complicated, often overlapping product lines.
CNET News Poll
Granted, Sun has, in its current Niagara and future Rock processors, some great intellectual property and expertise in designing multithreaded processors designs that can juggle a lot of tasks at the same time. But IBM would either have to adapt that technology to its own Power processors, a process that would take years, or embrace Sparc chips in its own line.
IBM or Sun could sell or license the Sparc line to Fujitsu, which has a line of its own and a Sun partnership. But the fact that Sun hasn't done so on its own doesn't bode well for Fujitsu's enthusiasm for the idea, and buying Sun just to sell off one of its mainstay businesses erodes the market-share-grab rationale for the overall acquisition.
Sun also has a respectable line of x86 servers using chips from Intel and AMD. They aren't a quantum level above the competition, though, and IBM already has a lot of in-house expertise with heavy-hitting x86 servers.
In storage, Sun made a big bet by buying StorageTek for tape drives that compete directly with IBM products. IBM might be able to consolidate customers in that market, but it's not a big growth area. Potentially more interesting, though, is Sun's Thumper line of x86-based storage devices, which have shown some life.
Software
Software is another tough sell for the bean counters. IBM's embrace of Sun's Java helped cement its success on servers, but for Sun, Java is more about intellectual property, industry influence, and bragging rights than big money. IBM might well have "Java envy," as McNealy quipped in 2004, but it can console itself with having a much larger Java software business in WebSphere.
The open-source connection in general is stronger. Both Sun and IBM have a history of both proprietary and open-source software. IBM got an early edge through its embrace of the Linux operating system, support for the Apache server software, and founding of the Ecplise programming tool project, but Sun arguably has leapfrogged IBM with a more-open-than-thou philosophy under Jonathan Schwartz; Sun's open-source move now embraces its two biggest software assets, Solaris and Java.
More compelling for IBM perhaps is MySQL, an open-source database product widely used to power up-and-coming Web sites. IBM knows how to sell a database, but MySQL fits in a market where IBM's DB2 doesn't.
However, making money from open-source software is a challenge, even if it's a great way to appeal to developers and to needle Microsoft. So the appeal of Sun's software business is much less direct than something that would contribute to IBM's top and bottom lines.
Cloud computing, which combines hardware and software, is an area where Sun has some experience and some bruises; it announced a second attempt Wednesday to tackle the market for a general-purpose computing foundation that customers can pay for as needed. IBM has some experience in the area--including a history that extends to a cloud computing progenitor of decades past called time sharing--and overall, it's hard to imagine that IBM is unable to do this on its own.
Intangibles
Sun and IBM have different cultures that could prove difficult to integrate. Sun, based in Silicon Valley, is an engineering-centric, free-wheeling company willing to try many ideas and see which ones stick. IBM is more conservative and driven by business concerns. Its bold moves often take years to pan out. Both companies share a passion for research and development, but how they bring that to market differs greatly.
Sun employees looking at the company's troubles might well be happy to don blue Oxford shirts, at least figuratively. But it's not easy to reconcile different procedures for allocating resources, marketing products, assessing their success, and charting new directions. And IBM might well sidestep cultural mismatch issues by laying off thousands of Sun employees.
The closest parallel from recent history is Hewlett-Packard buying Compaq--the deal that McNealy said in 2002 was "a slow-motion collision of two garbage trucks." HP and Compaq had overlapping product lines, too, but fairly rapidly coalesced them, for example, by immediately displacing HP's x86 server line with Compaq's stronger line and by scrapping Compaq's Tru64 Unix. What's different about Sun and IBM is trying to figure out which Sun assets would emerge victorious over IBM's.
The fact that a company as large and rich as Sun could be had for $4 billion or so must appeal to IBM, which doubtless expects to emerge from the current economic problems as a consolidator, not as the consolidated. But the acquisition would have to be justified not so much as fleshing out IBM's already rich product portfolio, but rather on the basis of acquiring good engineers, a strong portfolio of intellectual property, a reasonable developer community, and one less competitor in the market.
One key missing piece from all of the press around IBM's Cloud building initiatives is what exactly they are going to offer. So far, it just seems like new data centers being built around the world. There have been few mentions of what will be available--for example, will there be VMs, on-demand deployment, Java environments, databases or is just hosting?
And while the data center physical infrastructure is obviously the first step, vendors seem to be confusing the physical with the meta-physical in the Cloud discussion. I pointed this out in the past when IBM announced a Cloud initiative that was really just blade servers and hosting.
I would suspect that whatever IBM comes up with in terms of offerings will be first geared toward their existing hosting customers--which could be considered a "safe cloud" with appropriate security, backups etc. versus an "open cloud" that would offer less control. Like Sun, IBM owns all the necessary pieces to create a high-quality offering, and to date has been very good about open standards. It would be great to see IBM take the lead on defining what Cloud computing looks like.
So the big question is whether or not this is just good marketing, making hosting look like something much sexier?
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